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Sunday, September 27, 2015

FATCA – cost and effect

The United States’ Foreign Account Tax Compliance Act
(FATCA) went into effect on 1 July 2014. A year on, financial
institutions are filing for the first time, but teething problems
abound, Paul Cochrane discovers, with some banks no longer accepting new US clients and registration volumes far below expectations.

FATCA,
which requires foreign financial institutions (FFIs) to provide
information on US accounts above US$50,000 to the US' Internal
Revenue Service (IRS), has been a complicated piece of legislation
from the get-go. The over 1,000 page Act, which is aimed at curbing
tax evasion, was delayed repeatedly after its passage in 2010, as US
authorities worked to persuade more jurisdictions to sign
Intergovernmental Agreements (IGAs), and FFIs to secure a Global
Intermediary Identification Number (GIIN).

The
uptake was slow due to FATCA's extra-territorial nature, requiring
legislative changes in many countries, including override of national
banking secrecy and to effect financial institution reporting to a
foreign jurisdiction.

With
FFIs having to screen all clients for US indicia as well as hiring
new compliance staff, FATCA has proved both onerous as well as
expensive to implement; it has cost an estimated $8 billion
worldwide.

Deadlines
and delays

Aware
of the complexities, IRS set a 'transition' period, running to the
end of 2015, for 'good faith' compliance efforts by FFIs; only then
would it start cracking down on what it terms 'recalcitrance' via a
30% withholding tax on US-sourced income, and the risk of being shut
out of the US financial system.

Despite
the transition phase, the legislation's complexities has already led
jurisdictions to extend reporting deadlines, notably one of the first
to sign up to FATCA, the Cayman Islands, a FATCA world leader, with
30,868 FFIs registered, pushed the date for providing details of its
US reportable accounts back to 26 June 2015. Luxembourg extended its
deadline from 30 June to 31 July 2015.

“The
IRS has extended FATCA reporting for 90 days, if you ask for it,”
said Malek Costa, Head of Group Compliance at BLOM Bank in Lebanon,
which operates throughout the Middle East. “The real issue was with
the software, at first we thought it would be easy to extract data
from the core banking system and send it to the IRS but it has been a
difficult task and took a lot of time. It involved many processes
starting from getting the authorized certifications, buying necessary
software that transform the file to be reported into .xml schema,
encrypting it and then decryption when extracting the IRS response
when validating the file.”

It
is not just upgrading software that is causing issues for financial
institutions. “Bankers are frustrated at the amount of paperwork,
and US citizens with the extra paperwork, of 80 pages compared to 5
to 10 pages in the US,” said Liz Zitzow, Managing Director of
British American Tax, a London-based US accounting firm.

Irreconcilable
differences

The
extra form-filling is expected to generate numerous problems,
particularly filing figures that correspond with other tax files;
filing on the value of shares; around beneficial ownership and
exchange rate differentials. “I think everyone is going to be off
the mark and figures that match will be less than 5 percent,” added
Zitzow. For example, “tax filers don't use the exchange rate that
banks use as many people do their own forms.”

Filing
issues are compounded by the 7.6 million US citizens abroad having to
fill in the Foreign Bank Account and Financial Accounts Report
(FBAR), a BE-10 form on foreign affiliates, and other tax forms. “I
estimate there will be around 100,000 false positives on FATCA,”
said Professor William Byrnes, Associate Dean of Special Projects at
Texas A&M University's School of Law. “I find the forms
difficult, and I've written a 1,500 page analysis on FATCA. Many
issues are unsolved or unworkable.”

A
concern for FFIs is that the IRS will audit institutions over the
data they send, with the ability to go over 10 years of records.

“They have the data to match taxpayers information with the
information they're receiving from financial institutions. So if the
IRS knows Mr X made a transfer from the US to an account in bank Y,
and the bank did not report this account, the IRS may ask bank Y if
the account is still active. If the bank says yes, the IRS will ask
why it wasn't reported. They could investigate,” said Costa. “If
the client declared non-US status with no US indicia in the
electronic and paper records, the bank is then covered. The reason
for doing enhanced due diligence is to mitigate the risk of
identifying the accounts with US indicia and thus minimizing IRS
investigations. This is a conservative approach for applying the
FATCA procedures.”

American
exodus

While
banks have to screen for clients above $1 million, the next IRS
requirement, by 2016, is to screen for all US clients.

An
unintended consequence of FATCA has been Americans renouncing their
citizenship due to the extra due diligence. Already a record 1,336
Americans have done so in 2015, according to the IRS, while earlier
this year a survey by the deVere Group, a financial consultancy,
found that 73% of expatriate Americans were considering relinquishing
their passports due to FATCA.

Banks
are also shunning American clients, unless high net worth
individuals, due to the extra due diligence required. “Over half of
UK banks will not take Americans anymore,” said Zitzow.

Furthermore,
FATCA is impacting the employment prospects of American managers
abroad due to filing requirements. “Many Americans are becoming
unemployable as they are not being given signing authority as
(companies would then be) exposed to FATCA,” said Jim Jatras,
Manager of RepealFATCA.com in Washington D.C.

Not
a priority for all

But
despite the fallout (or maybe because of it), there is still a long
way to go for global FATCA compliance. As of June 2015, 165,461 FFIs
have registered on the IRS FATCA portal, according to Byrnes. Such a
figure is well below what the IRS initially suggested, of 500,000
potential FFIs to be registered worldwide, while others suggested
800,000 to 900,000 FFIs. Indicative of the low uptake, the HM Revenue
& Customs estimated that 75,000 UK financial institutions would
be impacted, yet just 23,256 GIINs are in place in the mainland UK.
The UK and its 10 main dependencies and overseas territories – the
Cayman Islands, the British Virgin Islands, Montserrat, the Turks &
Caicos Islands, Anguilla, Bermuda, Gibraltar, the Isle of Man,
Jersey, and Guernsey - comprised 74,694 of the GIINs, representing
45% of the total, according to Byrnes. Of concern to global roll-out,
of the four BRIC countries, there are just 8,254 FFI registrations.
“At the end of the day the lagging GIIN registrations tell us FATCA
is a back burner issue for most foreign governments,” said Byrnes.
“The IRS should have upfront employed a more diplomatic and
inclusive stakeholder approach.”

Regarding
IGAs, 57 countries have signed Model 1 agreements (with 11 signed
this year) as framed in FATCA, whereby the FFI
reports directly to their central bank/regulator, which then reports
to the IRS;and
seven countries have signed Model 2, where the FFI
reports directly to the IRS. A further 48 jurisdictions have
signed onto FATCA “in substance,” bringing the total to 112
jurisdictions, according to IRS figures.
The US, meanwhile, recognises 250
jurisdictions and territories worldwide. There are some 6,296 GIINs
in 131 jurisdictions without an IGA.

“The
IGAs are potentially a weak link as without them FATCA is not
enforceable - as the IGAs are not legal [agreements in the
conventional sense], having not gone through Congress or the usual
international treaties processes, and these vulnerabilities could be
exploited,” said Jatras. There is a degree of
uncertainty about the “consequences of sanctioning foreign
institutions.”

Exaggerated
claims

Meanwhile,
FATCA is not expected to repatriate the amount of tax stated by the
IRS and US Treasury in 2010 of more than $100 billion annually.
In 2013, the Congressional Joint Committee on Taxation estimated that
FATCA “will generate additional tax revenue of approximately $8.7
billion over the next 10 years,” or $870 million a year. “That
is a pretty big difference. So where did the $100 billion
come from? It was made up. My conclusion is FATCA will never pay for
itself, as amounts are so small in the big picture of things,” said
Byrnes. “The goal was already being achieved through the normal
tools the IRS has at its disposal and through negotiations with
Switzerland. There were 150,000 evaders before FATCA. Now, 100,000 of
them have been caught (through tax evasion probes into banks in
Switzerland and elsewhere), so that leaves only 50,000 left. As a
percentage of 150 million tax payers, that is not even a correction
error. A 50 percent whistle blower reward to find a tax dodger would
have been a better idea.”

With
some banks reluctant to on-board US customers due to the extra due
diligence, and certain Americans not wanting to hand over their
financial data to the IRS, an up-tick in financial crime is expected.
“I think shell companies will increase as it is a way to evade tax,
although AML (anti-money
laundering) procedures are
playing a strong role in fighting tax evasion by finding out who is
the real beneficial owner of an account as this later may be a US
person,” said Costa.

Looking
ahead, FATCA is expected to play a role in the upcoming US
presidential elections, with Senator Rand Paul proposing through
Senate Bill S66 amendments to the IRS Code, which would amend FATCA.
Also, the Organisation for Economic Cooperation & Development's
(OECD) tax information sharing initiative is gaining steam, which
could have implications for FATCA implementation and compliance.

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Profile

Paul Cochrane is the Media Director and Co-Founder of Triangle Consultants (triangleconsultants.net) in Beirut, where he has lived since 2002. He has written for over 80 publications worldwide, covering business, media, politics and culture in the Middle East, East Africa and the Indian subcontinent. He is also a media commentator, and has appeared on CBS-NYC radio, Canada's CTV and CBC Radio, Press TV, Etejah TV, Future TV, Al Manar, Sahar TV, Today FM Ireland, and South Korea's TBS eFHM radio.